Rising informal employment will increase poverty

08/04/2009 - Informal employment is at record levels worldwide with severe consequences for poverty in poor countries, according to Is Informal Normal?, , a new report by the OECD Development Centre.

The financial crisis is throwing many people out of work and, in developing countries with no unemployment insurance, they are forced to take informal jobs with low pay, no protection and high risk exposure. The study finds that 1.8 billion people, or more than half of the global labour force, are working without a formal labour contract and social security.

That number is projected to grow to two thirds of the workforce by 2020, assuming stable population trends and growth patterns, and could go higher if more jobs are lost to the economic crisis and more migrants return home to informal sector jobs.

“Even during good times with robust growth rates, in many developing countries informal employment increased in some regions,” says Johannes Jutting, one of the study’s authors. “Though India grew during the last decade above 5 percentage points per year, people there feel better jobs are not being created. In fact 9 out of 10 employees in India, approximately 370 million people, do not have formal social security.“

Is Informal Normal? warns of the potential draw-backs of a further increase in informal employment: lower wages and incomes in poor countries that do not have the means to provide comprehensive safety nets. Women – who constitute the majority of workers in poor quality jobs – will be particularly affected, as will youth and the elderly.

The majority of the 1.4 billion poor people in the world depend exclusively on their labour for survival. Low pay, with no social benefits, increases the likelihood that the Millennium Development Goal of halving poverty world-wide by 2015 will not be met.

Immediate and un-conventional action is urgently needed. Is Informal Normal? calls for a comprehensive package that promotes good quality job creation not only in the formal sector, but also in the informal sector. Improving infrastructure, enhancing skills development, promoting institutional reform and access to resources for informal businesses are key elements in this strategy.

These measures should be accompanied by public works, micro-credit or conditional transfer programs. The support of donor countries will be essential.

Some interesting figures:

• 1.8 billion people work in informal jobs compared to 1.2 billion who benefit from formal contracts and social security protection.

• Informal economic activity, excluding the agricultural sector, accounts for three-quarters of jobs in Sub-Saharan Africa, more than two-thirds in South and Southeast Asia, half in Latin America, the Middle East and North Africa, and nearly one-quarter in transition countries. If agriculture is included, the informal share of the economy in each region is even higher (e.g., more than 90% in South Asia).

• More than 700 million informal workers survive on less than $1.25 a day and some 1.2 billion on less than $2 a day.

• The share of informal employment tends to increase during economic turmoil. For example, during the Argentine economic crisis (1999-2002), the country’s economy shrank by almost one-fifth, while the share of informal employment expanded from 48% to 52%.